Some thoughts on sketchy public-sector accounting practices:
How accountants cook the books and step right up to the edge of accounting fraud
As a Certified Fraud Examiner, I’m often asked to take a look-see at balance sheets, cash flows, profit and loss statements, and budgets. There are tried and true methods of identifying book cooking. We check figures horizontally and vertically against established criteria. We search for anomalies. We identify oddities.
In April of 2012, The Economist ran an article titled “Book-cooking guide,” a brief piece about public-sector accounting practices, practices that wouldn’t stand up in the private-sector.
Corporation realizes the sale of an asset on this month’s books, but doesn’t get paid until next year. It’s a simple, yet fraudulent, way to make the numbers look better today.
Company defers the cost of an asset they just acquired until the next accounting period, again fluffing the books. But apparently in the public sector, these tactics are generally accepted.
Portugal effectively lowered its deficit in 2010 and 2011. Did they do this through fiscal responsibility? No. They cooked the books “… by taking over pension assets from private companies without recognizing the new public liabilities.”
Here in the good old US of A under the leadership of one of our most beloved fiscal heroes, President Reagan, we cooked the books to meet a deficit target. How? We just delayed military pay and Medicare payments for a bit.
Down here in the real world, there are accounting standards to meet. Shell games and sleight of hand are not at all encouraged and are generally treated as fraud. However, in the world where a couple billion here and a couple billion there add up to real money, freely adjusting the books is commonplace.
The International Accounting Standards Board (IASB) and the International Federation of Accountants (IFAC) apparently are asking that public sector shenanigans be placed under more scrutiny, something along the lines of asking governments to follow private-sector accounting rules. The IMF has also chimed in with their own “…laundry list of ways to keep sneaky politicians in check.”
As the writer of the article in The Economist says, “Don’t hold your breath.”